Newspaper article International Herald Tribune

Luxembourg Rejects Comparison with Crisis in Cyprus ; Banking Sector Is Larger but It Poses No Risk, Government Insists

Newspaper article International Herald Tribune

Luxembourg Rejects Comparison with Crisis in Cyprus ; Banking Sector Is Larger but It Poses No Risk, Government Insists

Article excerpt

The government said Wednesday that Luxembourg's banking sector, which is many times larger than the economy, is not in danger of a Cyprus-like collapse.

Don't look at us!

That was the message Wednesday from Luxembourg, which has come under increasing scrutiny as the debacle unfolding in Cyprus leads investors to wonder if other euro zone nations with outsize financial sectors might be vulnerable to banking troubles.

The Luxembourg government said it was "concerned about recent statements and declarations that were made since the crisis in Cyprus" in which comparisons were made to "the business model of international financial sectors in the euro area."

The tough terms of the Cyprus bailout were necessary to get that island nation back on its feet, the Luxembourg statement said, but it insisted that one provision -- that the Cypriot financial sector was found to have been "structurally unbalanced" and that by 2018 its size needed to be brought down to the European Union average of around four times gross domestic product -- "is considered to be an exceptional measure."

Luxembourg was put on the spot by Jeroen Dijsselbloem, the Dutch leader of the Eurogroup of euro zone finance ministers, who said Monday that the EUR 10 billion, or $13 billion, Cyprus bailout sent a message that countries like Luxembourg and Malta should "deal with it before you get in trouble," Reuters reported.

"Strengthen your banks, fix your balance sheets and realize that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem," Mr. Dijsselbloem said.

He also said that the Cyprus bailout could serve as a "template" for future rescues, though he later retracted that, saying that the particularities of each country would be taken into account.

His words made waves in Luxembourg, where banking sector assets are more than 22 times gross domestic product -- far and away the highest in the euro zone, according to Lombard Street Research in London. The Cypriot financial sector, by way of comparison, is about eight times G.D.P.

Malta, a tiny Mediterranean island state with a banking sector that is proportionally as large as Cyprus's, has also come under scrutiny. …

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